The Zappos Founder Just Told Us All Kinds Of Crazy Stories – Here's The Surprisingly Candid Interview

The story of Zappos, as it's told nowadays centers on the company's wacky culture, and Tony Hsieh's stewardship.

But, before it gained that reputation, and before it was gobbled up by Amazon, it had many lean years of just barely scrapping by.

We spoke with founder Nick Swinmurn about the process of building the company. What follows is a lightly edited transcript of our conversation.

The highlights of our conversation:

He was rejected by just about every VC. No one thought people would buy shoes online, even though Swinmurn had a stat that said 5% of people bought their shoes from mail order catalogs.

Tony Hsieh, who ended up backing Zappos, was selling off apartments to keep the company in business. Hsieh made a lot of money selling his first company to Microsoft. He spent a lot of it on apartments. He ended up selling those apartments to keep Zappos running.

Zappos lost a $250,000 convertible note. It had a $250,000 convertible note from Draper Richards, but when the note was set to convert they changed their mind and pulled the note. Hsieh had to pay them back out of his pocket.

Jeff Bezos offered to buy Zappos twice. The first time he said, "I'm going to make you an offer that's going to be unbelievable," but Zappos never heard what the offer was.

Zappos decided to sell when it started to realize that an IPO wasn't going to be viable. The company had big sales, but relatively small profits. It had a goofy culture. The VCs worried that the stock would be clobbered, thus making an IPO worse than selling to Amazon.

For anyone with a passing interest in how hard it is to build a startup, this is a good read:

Business Insider: When you started Zappos, you had no experience in this field right?

Nick Swinmurn: I was fresh out of college. I got out of college, worked for the San Diego Padres for a year. There I realized it was taking forever to advance, and was kind of slow paced, so I moved back to the Bay Area, entered a job at an actual Newspaper, for Autoweb, and that was my introduction to the internet. I didn't use email in college, this was 1996. I think I went to the library and signed up for ucsb.edu email address but I couldn't quite figure out how to use it, you'd go to the terminal and use it and all that.

I got a job at Autoweb and it was the opposite of the Padres. Everybody was so excited and young and you had a chance, whatever you could accomplish you could rise through the ranks. I got real excited and decided if these guys can do it, there must be something I can do.

When I left, that was kind of it, I had nine months experience at Autoweb and a season at the Padres. I think it was more indicative of the times I could get those level meetings, top tier VC's, because they were looking at everything, the sky was the limit and every category was ripe for being brought online.

BI: You came up with the idea for Zappos while you were at Autoweb. At that point, was it just yourself, just you and your idea?

NS: Yeah, it was just me. I left Autoweb to work on a couple of things. My Dad told me, you know I think the one you should focus on is the shoe thing. That's a real business that makes sense. So I said okay, focused on the shoe thing, went to a couple of stores, took some pictures of the shoes, made a website, put them up and told the shoe store, if I sell anything, I'll come here and pay full price. They said okay, knock yourself out. So I did that, made a couple of sales.

I had statistics from 1998 that 5% of all shoes sold in the US had been sold from mail order catalogs. I thought, it's a $40 billion business and $2 billion was done through mail order catalogues last year, which surprised me because I had never bought through a catalog. That one statistic was the key in getting in a lot of doors and getting people who's first reaction was "I don't know, shoes?", was like, "Well it's worth taking a look at, it sounds like there's a good mail order business already".

BI: When you went around presenting the idea you were met with a heavy dose of skepticism, right? Nobody really believed in that statistic?

NS: We would have that conversation over and over again about, alright, no one is going to buy shoes without trying them on. I would say, "No, last year 5% of shoes sold in the U.S. were sold through mail order catalogues," and they'd say, "Yeah but nobody is going to buy shoes without trying them on." And it was like, did I just say that out loud or inside my head, but let me repeat it, "last year, 1 out of every 20 pairs of shoes sold was sold through a mail order catalog." "That may or may not be, but no one is going to buy shoes."

There were skeptics at different levels. Sequoia was pretty receptive to the idea, I think they had just invested in a watch company that was making good traction in watches. I had no connection with them other than a guy, I had a temp job at Silicon Graphics, a guy I had worked with, had introduced me to a guy there and we got all the way through to the partner meeting at Sequoia, which was the farthest we got with anyone. Everyone else was kind of one meeting and done, but Sequoia we got all the way through to the partner meeting, but then they decided to pass.

BI: What year was this?

NS: That was 1999. At that point, I had kind of exhausted all options as far as any connections to VC's, and gotten a bunch of "no's". Our attorney from Wilson Sonsini, who was my brothers father in law, he was like, look, I've seen some deals come across the table from these guys, I've never worked with them but from what I understand they're investing in anything, so you should go meet with these guys.

The website just said vfrogs.com, and there was a phone number on the website. So I called a left a message, cut a meeting with Tony, and by that point figured, screw it, forget the presentation, forget this that and other, forget trying to get dressed up and pretend you're someone you're not. Just got in there and talk about it.

I talked with him, he was young, just sold his company, he was excited about things, seemed a lot more optimistic then a lot of people I'd met with. I left there hopeful, thinking, if he doesn't get it, no one is going to get it. I heard back a couple of days later from Alfred, who was a partner at Venture Frogs, and they said, "Tony said you're really passionate about the idea so we're going to go ahead and send you a term sheet." That was kind of what got us going.

[Editor's note: Tony is Tony Hsieh, who ultimately became the public face of Zappos.]

BI: That's 1999 still?

NS: Yes, August 1999. I've had the little website up, I've sold a couple of shoes. So I went and raised a friends round, friends and family I always call it but there was no family involved so I guess I just call it friends. Anywhere from $2,500 to $10,000, people ranging from my buddy from high school, to my chiropractor. I put together $150,000, and so that was the Series A, now I guess it would be the seed round. We started that, hired a couple of people, friends, jack of all trade positions and that led to Venture Frog.

BI: I bet those people are really good friends now.

NS: It's funny, one of them had put money into the $150,000 and then he came on to start working and after about a month, he's like, this is pretty cool and all, right before we closed Venture Frogs round, he's like, this is fun but this is my last chance to drive around the country and go crazy. So I'm going with a buddy from college, and we're going to drive around the country in a van for a month. If I got a job when I get back awesome, but give me a bunch of Zappos thirst and stickers and I'll pass them out. So he would just go around the country, having fun, and would go through a drive thru and slap some Zappos stickers on it. When he came back he never came back to work for us but he did really well from the friends and family round.

BI: Then you went through a lean period, right? It took a while, it wasn't like Zappos was an overnight success. How did it work out from there?

NS: 1999 we did a couple of hundred thousand bucks, maybe even less.

BI: Are you still going to the local shoe store and buying them or had you been able to establish connections with Adidas and all these other companies?

NS: We had combo. In August '99 we hired Fred from Nordstrom, he was at the San Francisco Nordstrom. He came on and he had some connections. We went to our first shoe show in August of 1999 and we signed on I think 12 brands, and they were all mens brown comfort shoe brands. Those brands we had drop ship relationship but that's one small category so we still had footwear etc, and I can't remember the other shoe stores on board so we appeared to have a wider selection.

Pretty much August 1999 was when we began transition into trying to work with brands direct. We worked with Shoe Pavilion for a long time, we worked with shopsports.com, which was Coughlin's oniline division for a long time. We worked with a shoe store out of Atlanta called Friedman Shoes, which is all exotic skins…it's like where all the athletes go when they're in Atlanta. So we had mens comfort shoes, general shoes, then we had a ton of green crocodile, size 22, double E, shoes. We had a weird selection but slowly but surely started adding brands.